100 NOVEMBER / DECEMBER 2022 Foreign CBDCs First, I will consider the emergence of one or more foreign CBDCs in a world with no U.S. CBDC. What would be the effect on the non-U.S. company? Let’s assume the company acts pragmatically; it would only move away from using the U.S. dollar if it is better off by doing so. The discussion around this question usually tends to focus on the potential technological advantages of a CBDC and doesn’t grapple with the underlying reasons for the dominance of the dollar. That is, advocates for a CBDC tend to promote the potential for a CBDC to reduce payment frictions by lowering transaction costs, enabling faster settlement speeds and providing a better user experience. I am highly skeptical that a CBDC on its own could sufficiently reduce the traditional payment frictions to prevent things like fraud, theft, money laundering or the financing of terrorism.12 Though CBDC systems may be able to automate a number of processes that, in part, address these challenges, they are not unique in doing so. Meaningful efforts are underway at the international level to improve cross-border payments in many ways, with the vast majority of these improvements coming not from CBDCs but improvements to existing payment systems.13 For argument’s sake, though, let’s suppose that this foreign CBDC is more attractive for payments to the non-U.S. company, perhaps for technological reasons, or because the preferences of the firm’s consumers or trading partners change in response to the introduction of the CBDC. Due to the well-known network effects in payments, the more users the foreign CBDC acquires, the greater will be the pressure on the non-U.S. company to also use the foreign CBDC. In this case, it is true that the appeal of the foreign CBDC as a transactions medium—not as a unit account or store of value—might gain at the expense of the dollar. These effects will likely only be on the margin because they rely on a large enough number of individuals and businesses being nearly indifferent between the dollar and the foreign currency in CBDC form. But the broader factors underpinning the dollar’s international role would not change. Changing those factors would require large geopolitical shifts separate from CBDC issuance, including greater availability of attractive safe assets and liquid financial markets in other jurisdictions that are at least on par with, if not better than, those that exist in the United States. The factors supporting the primacy of the dollar are not technological, but include the ample supply and liquid market for U.S. Treasury securities and other debt and the long-standing stability of the U.S. economy and political system.14 No other country is fully comparable with the United States on those fronts, and a CBDC would not change that. Finally, as I’ve noted before, it is possible that a foreign-issued CBDC could have the opposite of its intended effect and make companies even less willing to use that country’s currency. Since digital currencies would make it easier for a government to monitor transactions, shifting to a CBDC might make a company less willing to use that country’s currency. For example, I suspect that many companies will remain wary of China’s CBDC for just this reason. U.S. CBDC I am also skeptical that a U.S. CBDC would affect this hypothetical foreign company’s decision-making. A U.S. CBDC is unlikely to dramatically reshape the liquidity or depth of U.S. capital markets. It is unlikely to affect the openness of the U.S. economy, reconfigure trust in U.S. institutions or deepen America’s commitment to the rule of law. As I have said before, the introduction of a U.S. CBDC would come with a number of costs and risks, including cyber risk and the threat of disintermediating commercial banks, both of which could harm, rather than help, the U.S. dollar’s standing internationally. Like a foreign CBDC, the technological advantages of a U.S. CBDC would have a hard time overcoming long-standing payments frictions without violating international financial integrity standards. For the non-U.S. company already conducting its business in dollars, introducing a U.S. CBDC would not provide material benefits over and above the current reasons for making U.S. dollar-denominated payments. For non-U.S. companies conducting their business in currencies other than dollars, a U.S. CBDC similarly would likely not be preferred to their current options. It could be that individuals outside the United States would find a U.S. CBDC particularly attractive, but, again, making a U.S. CBDC globally available would raise a number of We’re proud to celebrate 125 years of the Indiana Bankers Association! YourPremierBank.com Member FDIC Happy Anniversary!
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